India: The Companies Act 2013 - Changing India Inc....

Introduction

On August 30, 2013, the Companies Act 2013
("Act") was finally notified thereby
putting an end to a long wait for a comprehensive legislation that
is expected to herald a new era in corporate governance and change
the way India Inc. functions. The new Act is rule based since a
large part of the Act is dependent upon the allied rules. All the
sections have not been notified and in the first phase of its
implementation, the Government has notified 98 sections on
September 12, 2013. This newsletter provides a snapshot of some
key, selective changes that are brought by the new Act.

1. Formation and Capital Structure

The legislation has introduced the concept of a one person
company ("OPC") to the existing classes
of companies, public and private, and has also envisaged
additional/exclusive provisions for OPC, wherever necessary. The
Act has made some notable changes with respect to incorporation as
well as in the structure of its charter documents, Memorandum and
Articles of Association1. The changes include penalty
for facilitating incorporation by using wrong or incorrect
information, additional formats of the charter documents for an
unlimited company with and without a share capital. It also raised
the maximum numbers of members allowed for private companies four
times, from the prevailing 50 to 200, thereby paving way for an age
of larger business houses, structured entirely on private
participation.

There are some interesting amendments regarding companies'
capital structure. One such modification is regarding the minimum
subscription provisions. As a deviation from the old Act that
prohibited allotment of shares to public unless minimum prescribed
subscription in accordance with the prospectus was received, the
new Act has extended this minimum subscription condition to all
securities irrespective of whether shares or debentures. A blanket
ban on issue of shares at a discount, barring sweat equity
shares2 is contemplated under section 53 of the
legislation. Provisions for issue of global depository receipts by
means of public offering or private placement have been added under
section 41, which could have the potential to facilitate foreign
investment.

2. Conduct of Meetings: Board and Shareholders

Certain pioneering changes have been introduced in the way
meetings are conducted. Already, Directors can attend and
participate through video conferencing or other audio visual means
in the board meetings. This really obviates the need to travel,
particularly for the foreign directors. Further, a class of
companies, to be notified by the Central Government for this
purpose, will now be entitled to conduct voting electronically. But
the Act is silent as to the different modes that can be adopted by
the companies for the electronic voting system. The prescribed
limit for quorum of public company's shareholders meetings has
also been modified and will now be decided by the number of members
of the company instead of 5, as earlier. An explanatory section,
intended for giving additional clarity on the material facts to be
included in the explanatory statement to be enclosed with the
notice of general meetings and penalty for tampering with the
minutes are other interesting additions.

Business hours are defined for conducting the Annual General
Meetings ("AGM") and prohibitions are
placed on conducting AGMs on national holidays instead of public
holidays, a deviation from the 1956 Act. Another notable change
concerns the first AGM which was to be held within 18 months from
incorporation and was a privilege accorded to new companies under
the 1956 Act. This provision has now been removed and the Act
provides only 15 months for the conduct of the first AGM by newly
incorporated companies. The alternate method for calculation of the
limitation period for the first AGM based on the closing of the
financial year has been retained.3

Since it will be difficult for OPCs to comply with procedural
aspects regarding conduct of meetings due to its structuring, the
Act has exempted them from the purview of majority of the
applicable provisions.

3. The Board of Directors

The 1956 Act prescribed minimum 2 directors for a private and 3
for a public company respectively to constitute a Board. This
criterion has been retained by the new Act, but the maximum limit
of directors on the Board has now been raised from 12 to 15. The
Act has also removed the stringent compliance of securing prior
Central Government approval for raising the number of directors
beyond the prescribed limit and, instead, a comparatively simpler
method of approval by means of a special resolution of the
shareholders has been introduced.

Additionally, new changes include mandatory presence of
independent directors on the Board of listed public companies and
minimum one woman director in the case of certain class of
companies to be notified later, thereby bringing more transparency
and gender equality into the Board rooms. The legislation clearly
defines the role of such independent directors and has a detailed
"Code for independent directors"4 appended to
it, which contains explicit guidelines for professional conduct,
roles and responsibilities of such directors. They are bound by
this Code to play a role in the appointments, determination of
remuneration and removal of executive directors, managers and key
managerial personnel. In view of the fiduciary position held by
directors, explicit provisions prescribing directors duties have
been added to the new Act. These include keeping away from
situations in which they have conflicting interest with that of the
company, duty to make good in monetary terms any undue
gain/advantage on the part of the directors etc.

4. Auditors

Limited liability partnerships are now included within the gamut
of audit firms and entitled to be appointed as auditors. The
auditors of a company are now bound to report on the efficiency and
adequacy of the internal financial control system as well as the
effectiveness of its operations. The Act stipulates mandatory
rotation of statutory auditors. Instead of an annual appointment,
individual auditors can hold office for a maximum period of 5 years
whereas audit firms are allowed to retain the post for up to 10
years. A cooling period of 5 years is prescribed for reappointment
of auditors who complete one term i.e., 5 years or 10 years as the
case may be, of their office. This means that such auditors or
audit firms cannot be reappointed by the same company for the next
5 years after termination.

The recommendation of the Audit committee will also play a
significant role in the appointment of auditors including filling
up of casual vacancies due to resignation. The retiring auditors
are to file within the statutory period of thirty days a statement
about the termination of their office with the company and
Registrar of Companies and if the auditor is appointed by the
Comptroller and Auditor-General of India
("CAG"), then to CAG also. A power to
order removal of auditors of a company is now bestowed upon the new
regulator National Company Law Tribunal
("Tribunal"). This is a significant
departure from the 1956 Act.

Unlike the 1956 Act, the auditors will now compulsorily need to
attend the AGMs. The accountability of the auditors is enhanced
significantly by having the onus of reporting fraud noticed by
them, during the performance of their duties, to Central
Government. They are also prohibited from rendering certain service
to the company such as accounting and book keeping services,
internal audit, management services, actuarial services and,
investment advisory services.

5. Other key provisions

(a) Corporate restructuring5and winding-up6

Section 234 of the new Act permits cross-border mergers i.e.,
merger of Indian and foreign companies. India's central bank,
Reserve Bank of India ("RBI") will play
a significant role in such mergers as the approving authority along
with Central Government. Likewise, provisions for
mergers/amalgamations between small companies, holding and
subsidiary companies and other prescribed class of companies are
also separately provided for.

The statute has provisions for only two methods of liquidation
i.e., voluntary winding-up and winding-up by the Tribunal. Further
categorisation of voluntary winding-up into members and creditors
based upon the declaration of solvency from the Board is removed by
the Act.

A couple of other new provisions expected to bring radical
changes to corporate governance include:

Deep focus on Corporate Social Responsibility
("CSR"): An
increased CSR responsibility is cast upon companies having net
worth of INR 500 crores (US$ 80 million) or more, or
turnover of INR 1,000 crores (US$ 160 million) or more or
a net profit of INR 5 crores (US$ 0.8 million) or more
during any financial year, to promote social, environmental and
ethical conduct. Effective from April 2014, they will have to spend
at least 2% of their three-year average profit annually on CSR
activities. They are bound to constitute a CSR committee for the
formulation and monitoring of a CSR policy that will envisage
promotion of a wide range of activities including eradication of
hunger and poverty, promotion of education, gender equality and
empowering women, ensuring environmental sustainability and
vocational skill enhancement. These provisions are introduced with
an intention of making the companies responsible to the society in
which they function. The general perception is that this will not
only boost corporate charitable activity in India but also gives
companies a range of varying tax benefits. Clearly, the advisers
will need to devise a tax-efficient CSR strategy for India
Inc.

Class action suits: Any group or association
of persons who are affected by any misleading statements or
inclusion/omission of any matter in the prospectus of a company is
entitled to initiate action. Likewise, individual
members/depositors or any class of them who form an opinion that
the affairs of the company are conducted in a prejudicial manner to
them or to the company can approach the Tribunal for appropriate
remedies in the form of damages or compensation or demand of other
suitable action. These provisions enhance the minority shareholders
power to protect their interests.

Corporate Fraud: Unlike its predecessor, the
new law has defined "fraud" and dealt extensively with
it. With an increase in corporate misconduct and frauds in India,
this may be the right approach as this law empowers an agency,
Serious Fraud Investigation Office
("SFIO"), to tackle corporate scams. The
SFIO will have a statutory status and will be mandated to
investigate corporate frauds, coupled with an authority to impose
punitive measures and in specific instances, even arrest persons
found guilty of corporate crimes.

Conclusion

The hope is that the new contemporary and pragmatic legislation
will bring radical changes to the way corporate India functions. It
has all the right elements. Although it is more comprehensive and
appears to be uncomplicated than its predecessor, it is still in
its initial stage of implementation and will need many more
clarifications and subsidiary rules from the law makers to make it
fully operational. A more complete picture may emerge after the
publications of the supporting rules that are still on the anvil.
Until then, the situation of having two legislations in force on
the same subject matter is certainly peculiar and could possibly
create administrative burden. For instance, the definition of a
"foreign company" has not been made effective under the
new Act, yet the provisions applicable to foreign companies are in
effect. In such a situation, it is unclear whether it would be
essential to rely on the old Act for the definition while relying
on the provisions of the new law. So, the company and its advisers
will have to be mindful of both legislations, as well as the draft
rules to ensure compliance with the law.

Footnotes

1 Tables A – J of the Companies Act 2013 contain
formats of Memorandum and Articles to be followed by various types
of companies.

2 See Section 54 of the Act which states that sweat
equity shares may be issued subject to the conditions laid down in
this section irrespective of the prohibition on issue of shares at
a discount as contained in Section 53.

3 As per the proviso to section 96 (1), the first AGM is
to be held within nine months from the date of closing of the first
financial year of the company.

4 These are prescribed in Schedule IV of the new
Act.

5 These are covered under Sections 230-240.

6 Sections 270-365.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.

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